Calif. Attorney General Sues Standard & Poor’s

California's attorney general sued debt rating agency Standard & Poor's on Tuesday, claiming it inflated its ratings of certain investments, costing the state's public pension funds and other investors billions of dollars.

Justin Sullivan

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California Attorney General Kamala Harris speaks to reporters after California Gov. Jerry Brown signed the California Homeowner Bill of Rights in San Francisco.

The suit - filed in San Francisco Superior Court - comes a day after the federal government filed a complaint against Standard & Poor's, accusing the company of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis.

It was the first enforcement action the federal government has taken against a major rating agency related to the financial crisis.

S&P, a unit of New York-based McGraw-Hill Cos., has denied wrongdoing in that case.

Attorney General Kamala Harris's complaint alleges that Standard and Poor's violated state laws by using a ratings process based on what senior executives described as "magic numbers" and "guesses." From 2004 to 2007, S&P systematically misrepresented to the public and the state's public pension funds that its ratings of structured finance securities were based on an independent, objective and reliable analysis, and not influenced by its economic interests, the complaint alleges.

"For years, S&P placed its priority on maintaining its market share, instead of the investors who trusted in its supposedly objective ratings," Harris said in a statement announcing the lawsuit. "When the housing bubble burst, S&P's house of cards collapsed and California paid the price - in billions."

People are going to say this is retaliation for downgrading the US credit rating. However, to insist that S&P's ratings "were objective, independent, unifluenced by any conflicts of interest." is a joke.

We have a state law against using magic numbers and guesses? That would invalidate the entire state budget then.

If Sacramento was foolish enough to trust a New York company to provide "independent, objective and reliable analysis, and not influenced by its economic interests" then it is more delusional than I previously thought.

Why wouldn't S&P be influenced by its own economic interests? That is the foundation of capitalism!

John Bogle, the inventor of index funds and a pretty conservative guy, has said what is needed to ensure the safety and stability of the economy is not more rules but enforcement of existing rules, i.e., jail time for the worst offenders.